Monday, October 19, 2009

Bernanke's Speech and its implications

What the world needs now?

It’s not love sweet love.

Bernanke in the speech he gave today, besides looking at the circumstances of Asian economies in the business cycle, the ostensible topic of his speech, returned to a theme he has visited in the past. This is the danger of persisting imbalances: surpluses and deficits alike.

While he was very vague about how this should be approached, he was again clear on what needs to be achieved. High savings countries need to consume more and reduce the gap between savings and investment at home. High spending countries need to save more. There is a little something for everyone.

At the same time there is little evidence that any country is taking up a stand to pursue these objectives. Yet the risks are growing

Perspective on imbalances

One issue is that under the gold standard there were rules to the game. Deficit countries were forced to adjust because under the gold standard they lost gold reserves if they let current account deficits persist. No one wanted to run out of gold. So deficit counties usually hiked interest rates and slowed their economies down, contracting imports in the process to rebalance their trade, maybe they even ran a recession. While that system was disciplined it was also confining and it had the side effect that it rewarded countries that had gold mines. The current loose FX system that has few rules and none enforced has been short on discipline – very short. Hence imbalances have arisen, persisted and become enlarged in way that they never could under the gold standard.

G-20 not up to the challenge

The G-20 tried to consider a US treasury proposed to accomplish these same ‘Bernanke’ objectives when it last met. The proposal got lip service only. Absent some concerted effort to accomplish the goals of adjusting savings/investment imbalances, the pressure for adjustment will fall on the exchange rate.

Connections and linkages

The imbalances are one of the reasons for the dollar to be losing ground. The exchange rate is a remedy for US BOP ills since a weaker dollar will choke off US exports and spur US imports. But the dollar’s drop brings other tensions to the surface. Moreover, it is unlikely that the dollar can fall enough to purge the US structural deficit problem. The need for some sort of coordinated effort involving the realization of enlightened self-interest is long overdue. Yet the world’s most important economies are not about to cut any deals. Each sees its current state as in some way optimal for its own needs even though the whole picture is one of a very dysfunctional economic community.

The risk

History suggests that the sorts of problems that arise in the wake of these huge imbalances persisting and being extended are not minor inconveniences. Yet there is no agreement even on pursuing the goals that Bernanke has spoken of repeatedly and that were put on the table at the recent G-20 meeting. Growing payment imbalances have ended badly whether it was due to OPEC countries’ rising wealth, rising Japanese trade surpluses or China’s huge foreign exchange reserve accumulation. We can only wonder if the fallout from these imbalances will get worse as the imbalances themselves get bigger and they are getting bigger - in absolute terms and larger relative to GDP.

Can’t have your Egg Foo Yung and eat it too

China has goals that are bizarre. They are mutually inconsistent. It wants a weak currency to keep its competiveness in tact yet it does not want to keep accumulating dollar assets of which it has in abundance. But if it does not purchase those dollar investments, its currency will rise in value. The lack of a foreign exchange system with clear rules allows China to act like this lost soul with deeply conflicted goals.

The point, the risk, the dysfunction

To be sure Bernanke’s point is a sharp one. No one can tell you when we must get off this path onto one like the one Bernanke urges. By not adjusting, and letting a normal business cycle recovery occur led by US growth with surging US imports and a widening US current account deficit we are playing with fire. It’s a prescription for something bad to happen. It’s like high blood pressure. No one knows what price you pay for it, but we know it puts you more at risk to various health issues. So why leave this problem untreated when we have options and when better systemic health is in everyone’s best interest? That is the unanswered question.

Tuesday, October 13, 2009

A Noble Nobel Prize in Economics

Math gods! Economics has become too much about math. I find it curious that economics, which is social science is being vilified for being pushed in the direction of being a social science. Huh?

Curriculum: When I received my PhD in Econ over 30-Years ago Harvard was in a snit about dropping its history of thought requirement. B-schools have been short on ethics training. If it ain't math or quantitative it ain't worth studying.

NOT! - I can't you tell how glad I was that I read Koopman's "Three essays' in graduate school!!??

Ptolemy is dead - Are markets gods? Do all the planets rotate around them? Is there nothing about morality and ethics B-leaders need to know? What about anyone knowing about history (in this case economic history) and 'human behavior', read 'consumer behavior' (woo-hoo social science social science!)? Can the world really be subsumed in a series of equations (Issac Asimoz- read his Foundation series)? Maybe if the equations are complex enough. Maybe it's not just Sci-Fi, but it still is for now. But I doubt we are at that level of understanding for either human behavior or math, indeed I know it.

Math guys may get Econ PhDs from MIT but they work for Social Science wonks - Anyone who does policy work knows the importance of the non-math stuff. Public policy-trained economics often occupy high level jobs since success at some level is more about understanding politics, motivations and advertising (spin) than about having the best quality 't' or 'F' statistic. In any even I am far too suspicious of that quant work since the people with the same opinions keep 'proving' that they right even though guys on the other side keep 'proving' that 'they' are really wrong.

From X + Y = Z to the X-factor -- While 'The Journals' may cringe at this, in my grad work I'd taken a course in law and economics that a was a very useful way to put the quantitative stuff in its place. Up to now the 'quant' stuff was like The Blob, absorbing everything in sight. Models have a role, but its not to be placed on the altar. Broadening what economics is and does is a good thing. This Nobel prize does that.

Our inabilities are many - The inability to construct non explosive derivatives (Danger Will Robinson!, danger!) out of something as simple as a home mortgage should tell you that Quant economists exaggerate their abilities. My Dad helped people buy and sell homes for over 30-Years and never blew anyone up. I guess it takes a of idiots who think they are rocket scientists. If that seems off point then assess our ability to forecast something as fundamental as an exchange rate or even productivity.

Oh, yeah we can forecast things with trend. Good for us. Economics may have been taken down a notch to some but it seems to have found its soul with this award... these awards. I admit to being heartened more by the subject matter rewarded than by the fact that a woman won (shared)the top prize. Good for her, but better for what she did.

Monday, October 5, 2009

Policy Stinks

Policy STINKS! I don’t need no stinking stimulus…if it’s like this

I was critical of the stimulus plan from DAY ONE. The CBO scored it poorly. My point was and is that the plan had more ‘agenda’ than ‘stimulus’. So, one big Bronx cheer for Democrats that packed a roughly $850bln plan with stuff that was Democrat or friends-of-Democrat (FOD) friendly. More and more it’s looking like they spent a TON of (our!) money with little effect-sound familiar? Republicans do not have the patent on that! And- as you would expect the Democrat’s tack is to blame Republicans for it… (oh, their recession is worse than we thought. But in doing this don’t forget the role of the House and Senate ‘banking committees’ in making and changing the rules that destabilized markets since they each were headed by…Democrats). I hope no one let’s them off the hook for this. ALL politicians are the SAME. We have ONE party in America and it is run by the lobbyists. Moreover, just as the stimulus plan was crude and half-hearted from the start, the President, all on his own, has been reluctant to be a positive force. He has sourly met even pieces of good news. Then he switched his interest to health care reform and has been trying to sell THAT as an economic stimulus plan (sorry, that’s pretty lame, even if we like you).

Yeah! We lose the Olympics and gain a modicum of fiscal respectability - And then Mr O took time out to go to Denmark to plump for one of the biggest money losing schemes in the world that comes periodically (well second to the money spent and misallocated in election year cycles anyway), The Olympics! Why was that so important? Is Chicago in such great fiscal shape that it wanted to lose $6bln or so by staging the games? Or since Barack is from there, did Chicago think it could toddle right over to DC and Mr O would arrange for them to get the money from us? So Rio ‘won’ the Olympics...did it really win or did it just get stuck for the bill at the next global sports party? Hey, party in Rio, Lula’s buying!

Tuesday, September 22, 2009

A Chicken in every pot

As the G-20 meets the US is said to be in favor of 'a new wold economic order' It's not clear how that will work out. The idea is for big deficit countries, like the US, to save more and for trade surplus countries (exporters) to stimulate more domestic demand. It does make sense. Remember that some time ago Bernanke framed the problem as the other countries saving too much instead of as the the US consuming too much. But it's all part of the same phenomenon.

So how do you get here from here? What policies will the US propose to raise US savings? Will it put a VAT tax into play to discourage all consumption including imports? (Ouch!) Will it subsidize savings accounts with more tax breaks? What is the plan to achieve the rhetorical end sought by the Obama Administration? And what are the incentives for Germany, Japan and other surplus county exporters? What would their governments do to to spur consumption at home?

While we know that some of these steps need to be made what if we cannot agree on the nuts and bolts or enabling policy coordination?

Well, that's why God invented exchange rates.

Exchange rates are supposed to rebalance these imbalances. The dollar has been kept too strong for too long in the face of widening deficits. The adjustment system has failed to work; it failed to choke off this huge volume of imports. China's FX rate has been too low The EMU rate has been too low, the yen has been too low. So if this initiative fails you can expect the dollar to be one of the factors to move to create what policymakers refuse to create on their own.

One deliciously ironic things is that everyone complains and wonders about foreigners continuing to buy our debt. But buying less of it is exactly the remedy. It was the continued aggressive purchases of dollar assets that supported the dollar and kept it from falling in the face of huge deficits. Had the dollar fallen, US exports would have been stronger and imports weaker with a resulting favorable impacts on the trade balance.

We have gotten too deep into this hole because some countries- without thinking - were willing to buy huge amounts of US-based financial paper. Those purchases supported the dollar and financed the US deficit and financed their own continuing trade surpluses.

In economics all the pieces usually fit together. They do again in this case. So we should watch the G-20 closely and see if the policymakers have any workable ideas or if the grandiose rhetoric will go down in flames in the foreign exchange market.

stay tuned

Wednesday, September 9, 2009

America the beautiful-pessimistic, but beautiful

Yes, in America, the land of the free and the home of the brave, no one can seem to muster the backbone to be optimistic on the economy. By this I do not mean ‘stick out your neck’ optimistic, just not so pessimistic that you extrapolate every trend to the downside.

I recently heard an economist say that the recovery was going to be slow because the recession has been so bad.


Charting JOB recoveries - For most recessions the employment low point comes quite close to the end of recession, falling early in the recovery. But in the 1990 and 2001 recoveries the employment low points occurred well into their recovery period. That is not an issue here since we center all series indexed to their respective cycle lows in employment.

Job patterns around the business cycle - So instead of using the business cycle to mark time let's look at jobs dropping from their cycle peaks and rising from their cycle lows and ignore the business cycle dating. This treatment gets us away form those notions and in doing so it shows a different and seldom spoken aspect of job losses in and around recession periods. Job losses and gains tend to be symmetrical around business cycle periods. That is if we lose jobs in a slow U-shaped drop, we put them back on in a slow U-shaped rise. If we lose jobs in vigorous V-shaped drop we tend to put then back on is a vigorous V-shaped rise. We do not have ‘V-shaped’ drops coupled with ‘U-shaped’ rises.

The Real Deal gets the RAW DEAL - So the real answer is that if the job losses are severe in recession we should expect the recovery job gains to be strong. And the losses have been (and still are) severe in this recession so why are so few economists willing to talk of a strong recovery when history so clearly points to that as the MOST LIKELY CASE SCENARIO?

Pessimists rule!

Hold the presses…never mind - So why do pessimists rule? It’s an intriguing question. I think part of it is that ‘dog bites man and man might get rabies and could die,’ is a better story than ‘dog bites man, man get tetanus shot goes on his way and is healthy’.

The perils of forecasting - In recession it is never clear how we get to recovery. In expansion periods the economist that predicts recession is a pariah no one believes. Every cycle someone is right and often that person is right for the wrong reason.

The PARIAH MESSIAH - In this cycle the Pariah Messiah forecast was that housing would bring down the consumer and the economy. Instead housing has been an ongoing issue but it was the loan instruments, leveraging and reckless lending that crashed the financial institutions that still do not want to lend. They then shut out credit to each other sapped the markets of liquidity doomed jumbo loan financing and changed the terms and conditions of home financing in a way that bludgeoned housing and sucker-punched autos, both big ticket items that required bank involvement. Also oil at nearly $150/bbl did not help. No the doom-forecasters for the most part, got the doom they forecasted but the causes were completely different from what they had warned.

Paradox of thrift not of theft

Actually it will be the consumer to lead us to recover regardless of people saying it won't. And as for the needed rise in the savings rate that may happen and it will slow spending but it will not doom us to a paltry recovery.

The first thing to understand is that we know about the paradox of thrift and no nation has ever saved its way to damnation (boom, gloom and doom report aside). A higher savings rate will not rob us of our growth, there is so much more at work here than just the need to hike the savings rate.

Perspective! - The next thing is to gain some perspective. Pessimists say that consumers can’t spend and incomes can’t grow. But all this misses the point. The point is that 6.9million fewer jobs exist in the nonfarm payroll and there are 7million fewer employed compared to the peak in the household survey of employment.

What happens to those people?

Tradition! History (see graph above) tells us they get put back to work. If so they get jobs and get incomes. They amount to about 5% of total employment. So their return to the labor force is liable to be a key element driving incomes higher. Remember income is not just the product of current people working times their wage; it’s all the people currently working plus those brought back to work times the number of hours they work times their wages. And that is just for the wage component of income. And wage as salary income revives so will profits, rents and so on.

The arithmetic of pessimists- Productivity has remained strong in this cycle. If population growth is 1% per year and productivity is 1.5%, then we can grow at 2.5% per year –and that is at the lower work week with 5% of the workforce remaining unemployed. But that won’t happen.

The arithmetic of realism - The work week will go back up further boosting growth during that transition. The SEVEN MILLION unemployed will go back to work. If they are hired at an astonishingly slow pace and if it takes five years to re-employ them, then growth can look like this FOR FIVE YEARS IN A ROW: 1% for population 1.5% for productivity and 1% point more per year for five years as we put the unemployed back to work. That’s 3.5% per year. And we still get a transitional bounce on top of that as the work week segueways itself back up to normal.

Let me add that we have a government stimulus program of growing impact to help make this happen in 2010.

Pessimists must be related to ostriches - I cannot for the life of me understand what the pessimists are thinking – are they thinking? Do they think that the seven million unemployment are going to go bury themselves at Forest Lawn and disappear forever? It’s not just a matter of looking at my job growth chart. It’s a matter of thinking about this country and what is likely to happen. Life goes on. People pick themselves up and go on with their lives. Sometimes dreams are shattered. But writing-off the recession job-losers as if they will disappear is a big mistake. If the jobs in Detroit are gone for good then, new ones will be formed or people will move. Houses may become abandoned. But those people will go somewhere else and they will work. We saw this in the wake of the first oil price bubble when prices went back down and whole unlived in apartment complexes in Texas were bulldozed. Texas survived. Look at the evisceration of Louisiana after the floods. Whole neighborhoods are gone but the people are elsewhere rebuilding their lives.

OHHH but it will be different this time - Maybe it will be different this time; maybe it will be slower this time. Usually jobs are put back on faster than they are lost. But the reason to dump pessimism is strong. The great pool of formerly employed will be a powerful job-creating force. Don’t forget the supply side. These people will want to work. The one differing factor is that there may be ‘some displaced workers’ close enough to age of retirement to not reenter the labor force. That is a difference with past cycles and it could impede the tendency to rehire this time around. Still, that should be small potatoes.

Wednesday, September 2, 2009

Why credit the ephemeral? Two Gripes:

One gripe...
There is no doubt that cash for clunkers ($4C) has helped the economy. Just look at the auto sales.

And in selling cars, inventories were drawn and will be rebuilt spurring production, putting people back to work, stimulating income growth. Amen.

Finally a plan that worked...but for whom?

Some of these people going back to work will be Americans. You see, a lot of Japanese-made and Koerean-made cars were bought in the $4C program. That will come out imports eventually and that will blunt the impact on GDP while putting Koreans and Japanese back to work.

As for the big stimulus plan (Obama-nomics) its impact has just begun to uncoil. It will make its big strike in 2010. Our data are barely from mid-year 2009.

But the WSJ and others want to chalk the progrss up to stimulus.

Yet stimulus is not the only reason for a rebound. All recessions -even severe ones- end. We have offered several different calculations on how they end. We have shown/argued that when recessions are severe and job losses are severe recoveries tend to be strong ('recovery' refers to the first 12 months or so after recession ends). Separately we have shown that if we look at job losses per se in business cycles but not tied to the cycle timing itself, job gains tend to follow about as rapidly as the losses that had preceded them. That finding is independent of stimulus.
It is the automatic self-correcting aspect of the economy at work. And we do not deny that government might play a role in getting the economy to make that turn. But once the turn gets in gear natural forces are at work.

A second gripe...
Treating indicators as fact...
I also wonder about the ADP. I see it being reported as though Moses brought its number to market on stone tablets. I'd sure prefer to hold my judgement on job growth until I see the real figures. We know that the purveyors of the ADP survery are 'full of themselves' and have even spoken of how their survey is better than the one conducted by the Labor Dept. Sorry if I don't sign on for that Kool Aid-drinking fest. Last month ADP was well off the mark. This month the ADP shows continued improvement compared to is error-laden report of last month. Unlike the WSJ, I will reserve comment on how fast job improvement is coming along until I see real numbers from the Labor Dept.

However, on the positive side, the ISM MFG report did show a turn to growth in its survey and its employment gauge improved in August. Well, ADP says it is better than the ISM results but (big BUTT) that boasting all comes from in-sample observation-hitting. In real time ADP is missing the diminishing job losses and it it really missed the slip to outsized job losses as the recesssion became intense.

I'd reallly caution the Journal to speak speculatively of what the ADP indicates instead of treating it like manna from heaven. It's been more like Manny from Brooklyn.

I remain optimistic that improvement continues at a rapid pace and look forward to seeing that view borne out in the Friday jobs report.

Friday, August 28, 2009

A counter point to the U of M Sentiment Report

Or, How bait and switch takes its toll on confidence...

Cynicism: The commentary in the core of the U of M report has some elements that are a bit brighter but it also contains some really dark observations, conclusions and worst of all extrapolations. It is my own conclusion arrived at by looking at the responses to these surveys in the business cycle that they do not always turn up very sharply when economic conditions begin to improve. While people do know their own communities very well, when the news is bleak people tend to be skeptical. Sometimes even good trends are not to be believed.

Extrapolation: In the U of M commentary Richard Curtin Director of the Reuters/Uof M Surveys of Consumers refers to a ray of hope accompanied by the grimmest assessment by consumers of their personal finances since the 'Great Depression'. Thanks for that DICK. Has U of M really been polling people continuously for that long, or was that hyperbole?

Counterpoint on Depression: What can we make of Curtin's remark? First in the weekly ABC consumer comfort poll we can note that the personal finance index is up strongly over the last eight weeks and while it is not by any means in 'great shape' that personal finance index resides in the bottom 15 percentile of its range, a range that does not include the Great Depression but extends back to 1986. To the ABC survey this is not the worst personal financial environment since the Great Depression; it's improving and its not even the worst since 1986.

Unemployment yet to peak: REALLY? -- Next Curtin noted that consumers did see fewer layoffs and thought that unemployment was stabilizing but that it still would peak at over 10%. Man, I wonder what sort of macro-models these men-in-the street are using? 500 equations? 1,000 equations? How would they even know this crap unless they gleaned it from the press, a press that has been predisposed to feature news reports each more pessimistic than the last. So is this question really about what is being reported or what people can parrot back? AWK... Polly want a job AWKK!

NO INCOME GAINS!! Only one in four consumers anticipated any income gains at all in the year ahead. Even with 'low inflation' just 13% anticipated any inflation- adjusted income gains during the year ahead.

Wait one minute! Reality check! This is a curious result to me. Consider this: while municipalities and states are under pressure government workers are generally protected from inflation. Municipal unions are strong and 17% of workers are employed by state, local or the Federal government. That's nearly one-in-five. Next there are retirees whose Social Security payments are indexed by the CPI. And then there is everybody else. Do those numbers make much sense with that survey result?
Other results to compare- The Conference Board does not ask about inflation- adjusted income but its survey asks about income expectations. Positive expectations responses rose to 10.6% from 10.1% in August a monthly rise not a drop. The lowest reading from the Conference Board came in March 2009 when only 7.8% of respondents thought that incomes would rise. There are no inflation adjusted results per se in tha report but the Conference Board survey continues to see inflation expected above 5%. So when Curtin asks in the U of M survey about pay increases above the rate of inflation the response is an interesting one but we don't really know what it means.

Are people matching the correct inflation metric to their own expected pay results? We just don't know.

Can consumer finances really be that grim? While the ABC poll has a consumer finance index that is improving over an eight week period, the U of M survey has the smallest number of respondents saying their finances had improved at all, at 16%. This is interesting. We know house prices are still falling but that the drop has slowed. Stocks are up more than 20% (or much more) from their lows back in March of this year. Average hourly earnings rose in July and the work week got a bit longer (that is for July not August and the U of M survey is for August). In previous research I have found that in looking at the Conference Board data, income expectations responses are closely linked to the inflation environment. The fact that U of M has a question on income relative to inflation does not settle the matter for me, its a better question than the one asked by the Conference Board, perhaps, but not one whose response I would necessarily take to the bank - or what used to be a bank. So what is really going on here? Isn't some of this income response just people admitting that inflation is low?

Bad for this stage THIS STAGE OF WHAT?? Curtin says that 'at this stage' in past recoveries consumers have usually sensed the gains... Okay DICK, what stage of the recovery are you assuming we are in? My reading of these surveys -and granted I do not have the detailed data you do - but in terms of what is made public it seems that your index measures are up from their lows as they should be. After that, early recovery performance is not very well behaved. The end-recession/early-recovery game is not a very stable or consistent one. And since economists are only saying that the recession may have ended in June, we are only two months or so into the recovery period. Are you basing you comments on TWO MONTH"S DATA, DICK? These are two months in which your survey is much sourer than are others. And in these sorts of periods the values for sentiment, the current situation and expectations can turn around like crazy.

Another pessimist feeds his flock - I add Curtin to the forces who are conjuring up analysis that is far too dismal. No wonder people feel so bad. First of all his survey is worse of that the ABC or the Conference Board survey. Second of all, his voice on the matter is, I think, way too glum. Does he really have survey results back to the Great Depression on a consistent sample to make the statement he made? NO! More spin-o-nomics here I'm afraid.

Pessimistic public figures set the tone for U of M respondents - After the first GDP release for Q2 growth showed GDP losses in Q2 were trimmed to 1% the President came out and said there would still be months of recession left. Now Curtin is telling us that in August people are glum. I wonder why? Do they know something or are they reading the papers? One problem with the survey is all these forward-looking questions that we cannot expect people to know anything about. Contrarily, I am impressed that when people are asked reasonably, to evaluate things that they can see and that they can know about, they detect improvement. But when you ask them to forecast the future what do we get? We get the responses from people who just heard the President days ago say that it's not a recovery yet so they act like it's not a recovery yet when they present their expectations.

Questioning the results: I would ask Mr Curtin why with stocks soaring, the U of M current personal finance index fell to 58 in August from 70 in July? Job losses slowed sharply in July - we do not know about August. Layoffs have been at a reduced pace for several months, and, in the survey itself, respondents said that trend continued. What is driving these bad survey results? I find them astonishing and, moreover, not very credible.

At turning points: I have concluded in my own research that in the Conference Board index the business conditions survey made the most cyclical sense. The business conditions responses are the stronger ones in this report from U of M this month, too. I think the consumer is being raked over the coals in part by politicians looking to get approval for their next big spending agenda.

VENTING I'M VENTING!! YOU WON'T LIKE ME WHEN I'M VENTING - Let me vent on one such item here. The Obama economic team tells us we cannot stabilize the economy without heath care reform. They talk about huge future medical demands on the system. They use this as an excuse to get support for their medical reform bill. One problem: that bill does not solve the problem. If the problem is the size of the medical deficits in the future, it makes those worse. The kind of health care reform we need is not on the table. It may never be on the table. But this is Obama and friends playing bait and switch.

BAIT AND SWITCH - Yes, this is exactly the kind of bait and switch economics that has gotten us in trouble again and again and has pumped up the deficit. Former President George W. Bush fired one of his economic experts when that expert said (in what proved to be quite a correct assessment) that the war in Iraq was going to cost much, much more than the White House said. The White House knew it but it pressed ahead with its agenda not wanting to be derailed by a public that would trip over an inconvenient fact. Now in the Obama administration inconvenient facts again are being submerged. If you ever wondered why I can't bring myself to join a political party, this is it.

Feeling alright? not feelin' so good myself... No wonder consumers feel so crappy, so confused, so mislead, they are the sheep that are led to slaughter. This is not how politics and economics in America are supposed to work. The consumer is supposed to have the facts to deal with to make a decision, not so much spin he can't get a handle on it.

That's part of the problem.

Wednesday, August 26, 2009


You have nothing to lose but your short-selling losses.

Think about it... What happens as we put the 6.6mln who lost jobs in this recession back to work (nonfarm jobs figure)?

If population grows 1%/yr with the labor force doing the same and productivity is up by 1-1.5% that means trend growth is 2% to 2.5% per year.

Then there is that 6.6mln to put back to work. To give you perspective, they comprise 5.1% of total employment.

What happen to them?

Suppose it takes 5 years to get them all back to work.
That means we take 1% POINT of the 5% POINTS each year. So for FIVE years 'trend plus 'make up growth' is 3% to 3.5%. That's trend plus another one percent per year.

You get the point?

The economy will not be puttering along at 2%-2.5% any time soon.

Moreover we have labor force in-migration and the labor force will grow faster than population. People will go back to work and spend in excess of their income (YES THEY WILL) for a while because they have postponed many purchases. At some point down, the road we will have to confront other issues like the extent of debt and reduced portfolio values more savings, etc.

But forget talking to economists or low-growth believing portfolio managers. Just use your head.

Do you really think that 6.6million people are going to be left unemployed..forever? Don't you think that the stimulus plan spending that lies ahead and the people that need to work will ignite growth in the private sector? Don't you think that job means income and income means spending and that there is a HUGE potential for growth to ignite over the next five years???

Don't you think that one of the reasons debt has dropped and spending is off so sharply is that 6.6mln fewer people are working? This not just current working people spending less. Put on your thinking cap. Take off those blackened glasses.

DO NOT WRITE OFF the unemployed and try to 'project' an economy that will only limp along at 2% to 2.5% - the long term trend (please bow). THAT is not going to happen.

If you believe that it can then...


Tuesday, August 18, 2009

(PIP) Politically Inspired Pessimism

The most recent bug in my bonnet: Jack Healy a NY Times columnist is the most recent person to jump on the so-YOU-think-its-a-recovery bandwagon. His August 18th column is the object of my ire (link below). (Just to give you an idea where my head is at as I write Freudian, I typoed 'columnist' as 'communist' the first time around. Reader beware!)

Recoveryists: Let's make it very clear what we pro-recoveryists think.
  • We think that the economy has stopped getting worse.
  • We do not think that every single thing in the economy has stopped deteriorating but that enough is improving to put the weight of the economy more on the side of growth.
  • We do not think that everything is 'just fine.'
  • We do expect improvement to continue.
  • Those thoughts do not make us a wild bunch. Some us think recovery will be strong and some do not. We all think recession is over. That's our commonality.

Forecast with a view? The contrary view, that this is NOT a recovery seems to have its strongest and deepest roots among Democrat faithful, although why that is I don't really know. A recovery is not anti-Democrat. But I can see that an economy in danger and in trouble could be an excuse to spend even more of the public's money on another fix-it scheme. So is that it? Is this view really just an agenda forecast?

Pessimism meets Catch-22 -- The trouble is that all too many taxpayers/voters are getting angry over the monies that have been spent already. And to the extent some argue it is not recovery yet and that recovery will be slow they seem to be saying that the monies spent (nearly two trillion on financial institutions and on stimulus) were not spent wisely. This road is a Catch-22 for Democrats. They should not go down it.

Obama bombs -- There is growing disenchantment with the funds spent on the stimulus program and anger among Americans who seek to answer to the questions, "Did this come out of my paycheck?" It's a question increasingly asked in the once famous and soon to be shunned 'town hall' meetings.

Town Hall Meetings: too dangerous to insure -- When people are angry with you and your policies you do not want to go face-to-face with them. That's what many politicians are finding out. Make them go to your local office one at time and wonder if you will be there, or make them go to Washington DC. Do not let them gang up on your in their home district. After all with unemployment so high the opportunity cost and the out of pockets costs of a local trip are very low for your constituents. Remember that those most motivated to attend probably are not your supporters. The idea that Republicans are invading these meetings is ridiculous. Just look at the facts...and at the polls.

The proof of the stimulus is in the recovery - People were happy enough to the get the downturn arrested when they were in recession, but now when the yawning chasm of depression no longer seems about to suck them in many are wondering exactly what was in that stimulus package? Many do not like what they are finding out. They are sure less than impressed when they look at the numbers for spending and see the continued pessimism in the outlook.

Straight ahead: But all this is really separate from the assessment on the economy. I hope I have dissuaded you from being the permanent pessimist on the economy to pursue some political agenda. The economy really needs to be seen in an objective light or policy will backfire.

Agenda-nomics: It is hard enough to make sense of what the economy is doing without being confused by having an agenda you want it to support. If you look back in this blog you will see that I was heavily critical of the stimulus program for having not enough stimulus and too much agenda. Those chickens are coming home to roost now.

Recovery is to recession as... Recovery is like a move from the intensive care ward in the hospital. The move implies that you no longer need such intensive care and involves the doctor's judgment about your prospects. . Doctors begin to look for your stabilization to become more positive and for you to head into recovery when they move you. They move you when they think the risk of backsliding has gone or diminished or if they have done 'all they can' for you. But just wheeling you out of intensive care does not make you any better. 'Cause and effect' do not work that way in the hospital or in the economy.
A forecast is not just an agenda-maker it is a tool - Those railing about the economy and saying that there are still a lot of problems are not wrong, they are just missing the point. The point is about where we are headed. The point is to recognize what economic data look like at the bottom of a recession and the point is to be decisive in your recognition of a new set of facts. The point is not to sit back and wait until every job-loser from the recession is re-employed before calling it a recovery. By then you may be on the brink of another recession. Whether or not that is true depends on how we conduct ourselves in this recovery. If we continue act like we are in a recession, making recession-like policy moves when we are in fact in recovery we will sow the seeds of a recovery that will not have staying power.

Bear in mind the consequences - So when you look at the economy and make your diagnosis, make it with a clear head to the consequences. The assessment 'recovery or not?' is about economics not about politics. I get the feeling that there is a NY Times bias out there, and maybe - just maybe - it's time to stop reading the business section of the Times for a while because their recent economic stories should really have appeared in the politics section, or in the Op-Ed.


Monday, August 10, 2009

What you read and what you believe.

Be careful about suspending disbelief

Now that the financial crisis is past and the economy is either in recovery or poised for one, we are seeing the disingenuous opportunists come to the fore. Congress has had some hearings to rake over the coals some who were real heros, like Ben Bernanke whose innovations and timely actions at the Fed were at the forefront of saving the economy and stemming the spillover from the incipient financial disaster.

This was being done, while Henry Paulson had a hot-line installed to Goldman Sachs.

No one in Congress has a finger so supple that when it is pointed out to find the culprits it curls back to point at them.

Without letting the GSEs accept mortgages from houses be bought with no money down and no income tests, bank lending decisions would not have been so bad. Ask your Congressman/woman how that happened... Without that policy shift, the low interest rates allowed by the Fed would not have been able to have done much damage to the housing market. So let's remember that, when we start pointing fingers.

In the private sector there are a lot of reports about how government intervention has stopped the process of healing private sector wounds. The argument is roughly that de-leveraging is needed. The private sector is doing it. But now public credit is growing and the deleveraing is not being achieved economy-wide as federal debt is replacing private debt.

Yes, this incredibly stupid, but perhaps seemingly solid argument to some is making the rounds.

Let's remember that without the government invervention we would not be here in circumstances this, able to be so smug with our smartly pants assessments of the post crisis economy. If private sector de-leveraging (as some want to call it; it is also joblessness, bankruptcy, foreclosure and more) were allowed to go on unabated without an offset from government, there would have been multiplier effects and we could well have wound up in the depression some warned about.

Yes, the upshot of government intervention has been more debt. But having government tax us in real time to spend what it spent would not have made much sense would it? And doing nothing would have been reckless. So be careful what you read and believe.

Paul Krugman wants us to be glad we have a people running the show who do not dislike government. Paul says one million jobs already have been saved by Obamanomics and admits he wanted even more spent (cha-ching!). But let's remember that it was the BUSH Administration that sought and got the big financial aid package. Let's remember Under Bush there had been a very timely stimulus program that had little impact. Let's remember that Obama's package is backloaded and has its much larger impact next year. I don't know how anyone but Obama's best friend could tally one million jobs created to date by this program when more spending in 2008 disappeared into the black hole of nothingness. Clearly based on the resutls of the 2008 stimulus program the economy is recovering (at last) on its own not onthe dribbling early funds spent under Obamanomics. Obamanomics will give a push after recovery has already set it.

So Democrats may not be the only ones who can ride in on a white horse in crisis, despite what Krugman says. And when we see the budget consequences of Obama's (not even Krugman's desired) economic largess we might well wish he had been less generous in spending 'our' money and had put more into stimulus that bit early and less into programs adopted by people who do not hate government, as Krugman says.

Government has a role and that should be to be as effective as possible not as large as possible. The government should try to direct this capitalist economy to focus on fairness, law enforcement and to provide a base of public services to ensure public welfare at some level, while remaining as small as possible to do the job. While there is a role for government (there are several of them in fact). I believe government has social responsibilities as one of those roles; it also has the mandate to be as effective as possibile. Spending a lot of money for the goal of one administration is not a success. That is the wrong standard. We do not yet know anything about the effectiveness of Obamanomics.

Once again be careful what you read and what you believe. And dont' forget to think. You can suspend disbelief in a movie if it suits you but don't do it while reading the financial pages.

Monday, August 3, 2009

ISM jumps Yet more good news: can we stand it?

So why are Obama and Co so dismal? While the data are so good?
Do we really get top 5% jumps in the ISM during recessions?

Strong jump this month in ISM - The ISM headline rise is so strong this month that it is in the top 5% of all mo/mo jumps among all readings since 1951 (about 700 observations). The jobs jump month-to month is in the top 5.3% of all monthly jumps over the same period. This is obviously a big deal. The improvement in the month is big by historic standards. But that is not the end of understanding this report.

The venerated ISM - The ISM is a venerated manufacturing (MFG) survey most of whose readings date back to 1951. Its export and import gauges are newer and so are order backlogs. The ISM expresses readings on the MFG sector overall and in terms of some specific components by looking at monthly gains. Data are presented as a 'diffusion index' which tells us how widespread the changes are for better or worse compared to the month before. Survey responses are limited to 'no change,' 'up' or 'down'. We aggregate them across respondents and express each category as a 'diffusion index' which consists of all the 'up' responses plus half of the 'unchanged' responses with the sum taken as a percentage of the total. In this framework the value of '50' represents neutrality. This a simple scalar diffsion index for each category condenses the information in the three responses into a single gauge. The higher the reading, the more widespread are increases; the lower the reading, the more widespread are declines. Fifty is the line of demarkation between absolute net declines and absolute net increases. People talk of this breadth as though it is strength, largely because there is a statitistical association between strenght and breadth. But the survey is really one of the breadth of the month's trend, not of the strength of the underlying components.

Why diffusion gauges are imperfect - The main way folks look at the ISM readings, is to observe the diffusion values. But there is more to understanding the ISM than that. The various ISM categories are all sampled the same way; component indices are constructed the same way, but they all respond differently and with different degrees of variability over the business cycle. That fact makes direct comparison across categories a bit confusing. Each componet diffsuion index has a different habitat over which it ranges. While each component can theoretically range from zero to one hundred, none have taken on both (or even either) of the extreme values in the past 50-plus year period of monthly observations. Some hold to much narrower ranges while others use much of their theoretical range. Inventories, the PMI index itself and order backlogs vary over just little more than a 40 point range within their 100 points of possibility. Production varies over a near-60 point range while new orders span a 50 point range. Supplier deliveries and prices range over a span of 80 points each.
Putting ISM readings on a more equal footing - So to put these in context we like to look at ISM components (1) as a percent of their means or (2) to see where the current value stands as a percentage of the range overwhich the component has varied or (3) to rank the components within their own ranges. Until some sort of adjustment like that is made we can't really compare readings across categories. For example the highest lifetime average reading among ISM components is 62.8 for prices and the lowest average is 49.2 for employment. These differences remind us that prices almost always rise - even if by small amounts. So, of course, the price gauge will tend to be high. In MFG, in contrast, due to rising productivity and competiveness constraints, jobs in MFG have actually been falling over the years - in absolute as well as in relative terms. This is clear as the diffusion index averages less than 50. Clearly a reading of 55 for employment would mean something very different than a reading of 55 for prices. For prices it would represent a low reading, below its mean - a good inflation result even though prices are still indicated to be rising at a reading of 55. But for employment it would be a relatively high reading (Indeed the employment reading was last as high or higher than 55 in November of 2005, nearly four years ago). Prices which are at a reading of 55 in July have risen from abnormal lows in the recession and were last this strong or stronger in August of 2008.
This month's readings - The levels of the variables this month range from new orders and order backlogs in the low 60th percentile of their respective ranges to the 21st percentile for inventories and the 42nd percentile for employment. Most reading are around the 45th percentile of their respective ranges. That is below the midpoint but not by much. Indeed, the low standing of inventories points to how lean they are and that is a lurking positive, since when demand picks up lean inventories will be rebuilt and will stimulate output.

Understanding the differences - Three components are above their mean values: new orders, order back logs and production. That means they are in really quite ordinary shape, and do not lie at recession levels or even at levels seen in a slump. At 71% inventories are the lowest relative to their mean; at 87%, prices are the next lowest; at 92% of mean we find employment and then the PMI index itself.

Sorting out the meaning - The more we look at the data across the components the more it is clear that the weakness is now much less pronounced than it once was, while the upward momentum is strong. Many readings are still below par. But they do not lie below normalcy by much and some of the more important leading components are among the strongest readings, like orders and production. The change in the ISM tells us about momentum.

The ISM: It's a 'good news' report that is being regarded as demonstrating that the economy is either in recovery or close to it.

Sunday, August 2, 2009

Obama hits speed bumps...

Modern presidents seem to have 'handlers'. When things go bad a president is not so quick to step up and correct himself as a hander is apt to rephrase what 'the president' meant to say.

In the past two weeks Obama has two such moments.

A week ago it was a conflict over a race issue that led the President to stub his toe. The President, without knowing the facts sided with a friend and a fellow black man over a dispute that oddly involved a black Harvard professor being arrested by the police in his own home. Maybe you and I can back a friend on the basis of his character without knowing the facts but the President should not, especially not in such a charged moment as this. The really interesting aspect of the professor/police imbroglio is not even that the President got involved; that is just what brought this episode to our attention. What is most interesting is this: that each of the participants in this confrontation was supposed to be an expert in race relations issues (black professor/white cop). Some experts eh?

But to most of us the issue is that we do not really know the facts, and we cannot judge what happened, just that the conflict and outcome are quite odd. And to US it really matters that the President leapt before he looked. His handlers have since tried to snatch him out of thin air and sit him down for a friendly beer with the two parties and let the moment pass.

So it has.

But then there was another odd moment for the president this past week, and it has grieved me more, since it is about economics and I do understand the issues. It is not yet an issue in the press and probably will not become one. It is the Saturday remark by the President, coming after GDP fell by only a 1% annual rate in Q2, saying that there will be many more months of recession. Huh??

"It will take many more months to fully dig ourselves out of a recession - a recession that we've now learned was even deeper than anyone thought," the president said in his weekly radio and Internet address.

"And when we receive our monthly job report next week, it is likely to show that we are continuing to lose far too many jobs in this country. As far as I'm concerned, we will not have a recovery as long as we keep losing jobs."

This makes no sense to me. It's true that the recession was deeper than anyone thought but that's no longer news, it's old hat. What's news is that the Q2 drop in GDP is (just about) shallower than 'anyone thought.' The President is supposed to be a cheerleader for the economy. Yet he continues to pour cold water on good news and emphasize bad news. The economy fell at a 1% annual rate and that is just a stone's throw from positive growth and that will likely mark the end of the recession (it's not automatic, however). Economists are now lining up the side of saying that the recession is almost over; meanwhile, the President is living in the past. (Don't stop thinking about yesterday?)

Over the weekend his Treasury Secretary began the contrary spin that the recession may be almost over, pushing the positive message but fudging on the timing.

Yet another Obama advisor, Larry Summers tossed this curve ball into the mix:
"Historically, increased hiring typically lags increases in output, so it's going to take time before you see it ... in the employment statistics," White House economic adviser Lawrence Summers told NBC's "Meet the Press."
For anyone interested in the FACTS, here they are:

Recession of
count of months to first gain in jobs then to lasting gain
2001...... ..... 7......................... 20
1990............ 4..........................13
average: .......5.5........ .........16.5
Average........2.0............ .........3.0

So what is the agenda and what is Mr Summer's point? Do job losses continue when the recession ends? Yes, always in fact. For how long? Well, except for the last two recessions for 2 or 3 months. Geez, is that a reason to shift national policy?

Don't get me wrong. I am not against extending unemployment benefits. Just because jobs start increasing soon after the recession ends and just because the recession seems about ready to end there are still reasons for more government involvement. There are significant blocs of people whose unemployment benefits will expire soon due to the length of the recession. Jobs will still be hard to get even as employment begins to increase on a monthly basis. So do it for that reason, not for some bogus reason. Extend benefits even though the recession is ending. Do it to alleviate hardship, if that's what you want to do.

Both Geithner and Summers cite the lagging nature of the unemployment rate. They see it peaking in 2010. And that rate does lag by more than job growth --but not by much. If it does peak in 2010, and not in 2009, it will come early in 2010, not late.

All this distortion about jobs and how long it takes for them to grow and the economy and how bad it is, is destructive to the economy. I will not again issue the analysis I have already presented in this blog. But a set of historic recession FACTS tells us that when recessions are deep, the subsequent expansions tend to be strong. So we could be putting people back to work more quickly than it's now anticipated and at a faster rate when we do.

I want the President to regain his focus. He is our national leader; he must rise above representing an interest group. When JFK was president he was president first, Catholic second. Obama must be president first and black second. He must not be so quick to jump to support friends. He also needs to get his economic facts straight as well as his role or mission. I fear that it is for partisan reasons that the President does not want to take ownership of the economy. He wants to continue to live in the past and to blame the Republicans for a recession that really has some pretty deep bi-partisan roots. I don't think Lawrence Summers is a help in that regard. The President needs to be OUR cheerleader not another disheartened voice. We have enough of those. It does not sound to me like Mr Summer's council is going in the right direction. Mr Geithner seems to have this one right by at least looking at the positive. But then there is all that talk about deficits and the possibility of tax hikes. It would be nice to milk the good news for a while when we have it.

Hey did you know that GDP in Q2 fell at just a -1% pace after dropping at a -6.4% pace in Q1. Good news, eh?

Even more to the point, we need the President to pick the policy he wants to implement and to tell us why for the right reason, not for the wrong reason. I think we have had enough of that 'bait and switch', don't you?

Thursday, July 30, 2009

Bernanke bashing... Fair game or not?

Save Ben! Reappoint Ben! I don't know why it is a new sport or what anyone gets out of it. But both Bloomberg and the WSJ have carried Op-Ed or columnist opinions that trash the guy that may have saved the economy, Ben Bernanke. Hey, he has made mistakes; he is human; but he also has come up with very innovative and timely ideas to stopper a crisis that was bout to run out of control.

Does Harvard know best? Amar Bhide (Harvard scholar) has remarks that appear in the Journal that are so incoherent as to make no sense. I wrote to Bloomberg about their anti-Bernanke article and have gotten no reply on that. I suppose we are supposed to give this comment in the Journal weight because the guy is from Harvard. Certainly it's not because of what he has argued. His article is a jumble of illogic.

Your point??? Trashing Bernanke as a academic who has no proven experience or management skills makes no sense once you admit that the guys running the banks (ruining the banks?) were life-long bankers with tons of experience.

Blame WHO??? Labeling the financial melt down as the result of lax regulation is a knee jerk response; I find myself falling prey to the notion too from time to time. But when the lawmakers change the rules and remake them such that the game is unsafe, how is anyone supposed to act safely when the new game itself is now intrinsically more risky? It was the lawmakers (not the regulators) that allowed 'nothing down' loans and 'no income test' borrowing. The bankers only followed suit, like driving too fast on a road because the speed limit lets you. Still, the bankers failed to see the heightened risk and they bear the blame for that. But don't blame the 'cops' for not arresting them for staying within the new higher and more dangerous speed limit.' Actually I think the lawmakers and bankers are more guilty than the regulators although the regulators did play a role in supporting the rule changes instead of fighting them.

Who is most guilty over sub-prime issues?? Blasting Bernanke for not seeing the dangers of sub-prime lending early in his term, when in fact the Fed had uncovered misdoings and had been silenced by its own Chairman, Alan Greenspan, a year or so earlier, hardly makes sense.

Is this central banking or hot potato??? Blaming Bernanke for not having more foresight when Greenspan was the guy who was there for nearly 20Years and was a staunch opponent of regulation also resonates with little clarity of the situation.

The least political regulator -- The Fed has been an honest regulator - not without fault, but honest and, for the most part, skilled. Had the Fed had a different Chairman prior to Bernanke it might have actually have done a better job. Instead, Bernanke became the unluckiest central banker as he had to follow the reign of the world's luckiest central banker - a guy who left just as his string of luck was running out. When the failure of a bureaucracy comes down to its leader's failings and one who was a known partisan who did not like part the job he was assigned to do (regulate) it's hard to fault the institution of the Fed for the outcome...or to fault his successor. But that is what Mr Bhide does.

Fiddle dee dee: Moreover, the lawmakers do oversee the Fed and they did not exercise much of that oversight. In his autobiography Greenspan admits to planning to say long incomprehensible things to throw them off track when they made him testify. He has never suffered any adverse repercussions from that admission. I find that odd.

A division of power that sets the blame -- The House financial services committee was willing to 'roll the dice,' as Chairman Barney Frank put it, to spread homeownership more widely. Once again this proves that the road to Hell is paved with good intentions. Good intentions may indeed make for some very bad economic policy. And they did. Such was the oversight of 'Congress.' Such things are not the fault of the Fed.

Like a Rock...not Iraq -- The Fed has in fact has been one of our better, more reliable institutions of late. Under Paul Volcker the Fed stopped a rising runaway inflation that had been the product of the combination of rising oil prices and previous Fed policy errors. Those previous errors came from a Fed Chairman who had been too partisan- at that time a Democrat (Arthur F Burns). Greenspan followed Volcker fighting a 'rear guard' action on inflation trying to reduce it slightly further. But then he lost his way in his zeal for pushing for de-regulation everywhere. In ignoring regulation violations that were in the Fed's bailiwick that were dredged up by one of its sitting governors, Greenspan made the cardinal policy error he is still trying to dodge. Greenspan said to let it go. In retrospect he argues that the Fed was too much of a bureaucracy for him to have controlled it so well. Don't believe it. So the Fed governor (Ned Gramlich) stopped pursuing what could have been the Fed's finest hour (in retrospect).

Greenspin - Greenspan blew that up by himself. He continued asserting that nationally home prices had not fallen, a stylized fact with no substance. Of course, nominal house prices had not fallen, inflation had been too high even in the previous deep recessions. Real home prices had dropped and now with inflation lower wasn't the real message that home prices would be more at risk not less as risk to drop in nominal terms?

Personal or institutional failings? You decide -- Why doesn't Mr Bhide see the difference between the personal failure of Alan Greenspan and institutional issues that pertain to the Fed?

Your point again?? Bhide's solution is to recognize that in the past, firms specialized. Now things are too complicated, apparently. Well maybe there was less competition and because of that firms could make more profit more easily. Maybe with essentially 'business-line monoplies' firms did not have to take as much risk to make money? Maybe? So is his point that there is more money in a monopoly?

An odd quote: Hence we have this odd statement by Mr Bhide about not being able to know everything about everything. (
See the address above about six paragraphs down for this reference.

Confusion - I don't get this point at all. I allude to it above... does Bhide believe in monopoly? Does he not believe in delegation and management at the Fed? Can firms only do one thing right? What sort of point is he trying to make here?

Growing Fed powers, yes but much, much more -- Bhide goes on to list the way the Fed's powers have gradually spread as though that is evidence or proof of his point. But what also spread were regulatory overlaps, regulatory holes and differences of opinion among regulators that allowed some instititutions to choose their overseer - a dangerous thing. That was not the Fed's doing but instead the environment in which it worked and eventually it was the Fed's undoing since the Fed was not the main regulator of either AIG or Lehman Brothers or Bear Stearns for that matter. But the Fed did find a way to deal with the fallout.

Fed is independent but not a loose cannon - The Fed in fact is a bureaucracy with lots of different branches and expertise. Governors are selected for their diversity in expertise and that has been more true in recent years when the challenges of economic specialization stepped up. The Fed is and always has been accountable. It reports to Congress twice a year and is overseen by GAO audits of its books.

Is more too much? Adding more regulation to the Fed's plate may spread it too thin, but I doubt it. More likely the Fed would simply need a new branch to focus on that aspect of enhanced responsibility separate from monetary policy. It seems to me that the real issue is not the question 'can the Fed regulate these markets?' but instead the question of whether the markets are doing things that should be regulated or that can be managed. Maybe some of these activities simply should be stopped.

TIME BOMB!!! Any activity that pays out today but does not reveal its true worth for several years is a ticking time bomb. Many derivatives had that property, as salesmen and traders were paid on a calendar year basis while stuff they generated and often only partly sold sat on their firm's books unsold and marked to a hypothetical market. Those are more the sorts of things that regulators need to think about.

Is hindsight really 20/20? Oversight needs to be different and more sophisticated. It needs to push back. And with the strength of the financial lobby that will not be easy regardless of which party is in power. It's not as simple as consolidating product lines and getting more experience at the helm. Mr Bhide does not seem to have a clue how complicated it all is and how the solution lies in having good people with skill and sound judgment. His brief paean to artificial rules and the role of the gold standard open a whole new can of worms for troubles to emerge. Not only is the Fed a good choice, but what other agency would have managed the last crisis so well? Who would you have trusted to take the lead in the last crisis? When put it that way the job the Fed has done shines even more brightly. Hindsight is said to be 20/20. In this case I'm not so sure. Criticism of the Fed sure has been far more myopic than that.